The prepaid mobile phone industry is stepping up efforts to combat and stop the damaging practice of handset trafficking. The diversion of new prepaid handsets from the retail market via transshipping has cost hundreds of millions of dollars in losses, if you combine both prepaid wireless and the MVNO space, according to Jeffrey Kapner, Senior Vice President of Marketing, Sales and Support, Total Call International.

“The worst part about handset trafficking is the damage it does to consumers,” says Kapner. Traffickers that are involved in bulk prepaid phone purchasing from retail stores, for the purpose of unlocking proprietary software and repackaging, hurt the consumer by stealing subsidies from wireless providers.

Traditionally, the cost of the cell phone is nominal to make wireless service affordable and accessible to almost everyone. The companies look to recoup their investment through the sale of airtime cards and other services, but when they lose revenues because of lost service, they are forced to raise prices on the handsets. Kapner estimates that a prepaid mobile phone that retails for $29.95 could rise to $100, to offset losses.



Trafficking Game

Every year traffickers divert several million handsets from wireless providers in the U.S. and from some equipment manufacturers. Networks of traffickers, or “runners” are solicited to purchase prepaid mobile phones in bulk from well known retail stores with the intent to sell the phones to “middlemen” or resellers. The handsets often wind up overseas, usually in Latin America, Asia and the Middle East, selling at a premium.

Traffickers have been known to be arrested for possession of hundreds of prepaid cell phones, and charged with collecting materials for terrorist acts, or drug and people smuggling. One such network was caught by the FBI, as they traveled the country buying Nokia cell phones. Though initially they were charged for promoting terrorist activities, it turned out they were involved in a phone-selling scheme. 

Information on www.stopcellphonetrafficking.com explains the preparation for resale. The phones are hacked into or “unlocked”, and then repackaged or “re-kitted” so they can be resold. The phones find a new home in counterfeit packages, which may include a charger that operates on the target country’s electrical system, counterfeit batteries, instruction manuals, warranties and other materials. Consumers who buy the repackaged phones never know that the prepaid mobile phone originally came from a Wal-Mart, Family Dollar or Target store.



Wireless V. Traffickers

U.S. prepaid wireless companies are going to court to halt trafficking of their products. AT&T Mobility, TracFone Wireless, T-Mobile, IDT, Virgin Mobile, and equipment manufacturer Nokia, are among the companies that have filed lawsuits against perpetrators. The first cases, filed in 2006 citing civil and criminal violations, were successful and resulted in numerous injunctions in federal courts around the country, and millions of dollars in damage awards.

Thomas K. Crowe, a lawyer in Washington, DC, explained that numerous state and federal laws are broken by people that participate in cell phone trafficking.  “The legal case against handset trafficking is solid with a long list of causes of actions,” says Crowe.

Among the civil and criminal violations are trademark infringement, fraud, federal and state advertising laws, and breach of contract. When someone opens a handset box, the implied contract is that you will be the user.

This year, on March 9, T-Mobile obtained a final judgment and permanent injunction against prepaid phone traffickers.  The judgment awards T-Mobile $5 million in damages against the corporate defendants. It permanently prohibits the defendants from engaging in any activities in any way related to the bulk purchase, unlocking or resale of T-Mobile phones and from using the T-Mobile trademark. If the defendants violate the injunctions, the orders provide a mechanism for enforcement by the courts and a minimum charge of an additional $500,000 in damages to be paid to T-Mobile.

The judgment was entered by a federal court in Brooklyn, New York.  It permanently enjoins DK Wireless Inc. (which does business as “Wireless Touch” and “Talk 2 Me”), IA Communication, Inc., and the companies’ principal, Ajay Mehta, from continuing to traffic in T-Mobile prepaid wireless phones. 

In a similar case, T-Mobile was awarded more than $9 million in judgments. The operator has several additional lawsuits pending in federal courts across the country as part of its concerted effort to protect consumers from prepaid phone trafficking.



Defendant Gets Five Years

TracFone Wireless, tired of being a frequent target of traffickers, has an ongoing campaign against alleged perpetrators. In 2006, the company started to identify and prosecute runners, middlemen, unlockers, and traffickers.

One defendant was sentenced to 57 months in prison. Muhammad Mubashir, 28, of Sugar Land, Texas, pleaded guilty on May 16, 2008 to charges of criminally disobeying a federal court order prohibiting him from continuing to purchase, tamper with or export prepaid mobile phones. In 2006, Virgin Mobile had filed a complaint against the same man.

TracFone called the guilty plea an important milestone in the industry’s battle against the bulk prepaid phone purchasing scheme. In November 2008, the company started a nationwide ad campaign to warn “runners” that the hacking or resale of prepaid phones is against the law. The company is committed to taking legal action against anyone involved in unauthorized purchasing, hacking or resale of TracFone or NET10 prepaid phones. They have filed numerous cases against more than 100 defendants, which have resulted in many injunctions and final judgments finding the traffickers’ conduct illegal and prohibiting them from ever again buying, selling, unlocking or transshipping TracFone and Net10 wireless phones.

Merchants have also been made aware of the problem, and many big name retailers are on the lookout for bulk buyers. They have agreed to sell no more than two or three TracFones to one customer a day.

“The rulings issued by various courts illustrate the seriousness of this unlawful practice and shows that both the industry and wireless providers are likely to continue to aggressively pursue such litigation to protect the industry,” says Crowe.

Kapner adds, “Total Call will aggressively pursue anybody who attempts to transship our products.”